V. Key characteristics of the euro area
The individual countries that now comprise the euro area were relatively open economies before they joined the euro area. However, they are now part of a larger, much more self-contained economy. The size of the euro area makes it comparable with major economies such as the United States and Japan. The euro area is one of the largest economies in the world, with a population of 318 million in 2006.The European Union as a whole has 27 Member States and a population of 493 million. By comparison, the United States and Japan have 299 and 128 million inhabitants respectively. In terms of gross domestic product (GDP) expressed in purchasing power parities, the United States was the largest economy in 2006, with 19.7% of world GDP, followed by the euro area with 14.3%. Japan’s share was 6.3%.The shares of the individual euro area countries are significantly smaller: the largest accounted for 3.9% of world GDP in 2006. Although the euro area can be significantly affected by developments in the global economy, the fact that the euro area has a less open economy means that movements in prices of foreign goods have only a limited impact on domestic prices. However, it is more open than either the United States or Japan. Euro area exports of goods and services as a share of GDP were significantly higher in 2006 (21.6%) than the corresponding figures for the United States (11%) and Japan (16.8%). VI. Benefits of the euro With the establishment of Economic and Monetary Union (EMU), the EU has made an important step towards completing the internal market. Consumers and firms can now easily compare prices and find the most competitive suppliers in the euro area. Moreover, EMU is providing an environment of economic and monetary stability all over Europe which is favorable to sustainable growth and job creation, and the single currency has done away with disruptions caused by sharp movements in the exchange rates of the former national currencies. The introduction of euro banknotes and coins on 1 January 2002 has made travelling simpler within the euro area. Prices for goods and services can be compared at a glance and payments can be made with the same money in all the countries. With the birth of the euro, foreign exchange transaction costs and foreign exchange risks were eliminated within the euro area. In the past, these costs and risks hindered competition across borders. Increased competition makes it more likely that available resources will be used in the most efficient way. With a single currency, investment decisions are much easier, as fluctuations in the exchange rate can no longer influence the return on investment across national borders within the euro area. Before the introduction of the euro, financial markets were, as a rule, national in character. Financial instruments, such as government bonds and shares were denominated in national currencies. The launch of the euro was a major step towards the integration of the financial markets in the euro area. It will continue to influence the structure of the euro area economy. Evidence of integration can be found, to varying degrees, in all parts of the financial structure: • The euro area’s interbank money market is fully integrated. • The euro-denominated bond market is well integrated, deep and liquid, and provides a wide choice of investments and funding. • The euro area equity market is increasingly viewed as a single market. • Domestic and cross-border mergers and acquisitions have increased among banks in the euro area. The depth and quality of an integrated financial market facilitate the financing of economic growth and thereby the creation of jobs. People have a broader range of choices for their decisions on savings and investments. Companies can tap a very large capital market to finance their business and use new financial instruments to protect themselves against various financial risks and to enhance the management of their investments.
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